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Earlier this year, I wrote about the Ontario Superior Court’s decision in a case involving an in-kind RRSP withdrawal, and the amount of withholding tax required to be withheld by the RRSP trustee (see “Determining market value for RRSP withdrawals,” AER June 2014).

Ontario Superior Court Justice Ted Matlow, who appeared not to be familiar with the interpretation of tax law, heard the original case. Therefore, it came as no surprise that his decision was recently reversed in the Ontario Court of Appeal (Iskander v. BMO Nesbitt Burns Inc., 2014 ONCA 582).

You’ll recall that Christopher Iskander directed BMO to deregister 66,667 common shares of Dominion Voting Systems Corp., which were held in his RRSP, and to remit the applicable withholding tax to CRA from the remaining cash in his RRSP account. The withholding rules apply whenever a client decides to withdraw cash or securities in-kind from an RRSP.

Since the Dominion shares were from a private company with no readily quotable stock market price, Iskander provided BMO with a copy of a recent offer by a third party to sell shares in the company at $0.50 per share. This way, BMO could establish a fair value of the shares and calculate the amount of tax to withhold.

Notwithstanding the documentation provided by Iskander, BMO refused to de-register the shares unless he could provide a letter from an officer of Dominion, setting out the fair market value of the shares. Unable to produce such a letter from the company, the taxpayer and BMO were “mired in this stalemate” and Iskander turned to the court for relief.

BMO argued in court that, in order to comply with its obligations under the Income Tax Act, it was necessary for it to properly determine the fair market value of the shares. Only after this information had been acquired would it “be in a position to determine the appropriate calculation for withholding tax.”

Justice Matlow ordered the shares to be de-registered and “determined there was no basis in law for [the trustee] to withhold tax.” The Court of Appeal said Justice Matlow “erred in so holding,” since that issue wasn’t before him. That’s because the Ontario Superior Court “was not the appropriate forum to make that determination,” since tax matters are only handled by the Tax Court of Canada.

The appeal court added the real issue was solely whether or not the taxpayer provided BMO with sufficient information to allow it to deregister the shares. The taxpayer’s position was that he had done so, since he’d had an offer by a third party to sell shares at $0.50 cents per share. The Court of Appeal concluded BMO “was within its contractual rights to refuse to deregister the shares on the basis of the information the [taxpayer] had provided. The offer, standing alone without the shareholders’ agreement or any other details of the company’s affairs, was inadequate.”

The court adds, “It remains open to these parties to resolve the matter on the basis of proper documentation,” and awarded BMO $10,000 in costs.

Clients who wish to deregister private company shares from an RRSP need to provide evidence as to the fair market value of the shares. The best evidence would be a third party valuation or, at the very least, a letter from the company setting out its opinion on the fair market value of its shares.

ACTION STEP
Get proof of fair market value before pulling private shares from an RRSP.

Originally published in Advisor's Edge Report

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